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On September 17, 2023, the U.S. Federal Reserve (Fed) is poised to make a pivotal decision by cutting interest rates by 25 basis points, bringing the benchmark range down to 4.00%-4.25%. This anticipated easing is expected to continue, potentially lowering rates to around 3% within the next 12 months. The fed funds futures market indicates a further drop to less than 3% by the end of 2026. Bitcoin (BTC) enthusiasts are betting that these Fed rate cuts will lead to significantly lower Treasury yields, which may encourage increased risk-taking across both the economy and financial markets. However, the situation is more nuanced, and the outcomes could diverge from the current expectations.
The Impact of Fed Rate Cuts on Treasury Yields
While the expected Fed rate cuts may apply downward pressure on the two-year Treasury yield, longer-term yields could remain elevated due to ongoing fiscal concerns and persistent inflation rates. The U.S. government is anticipated to increase its issuance of Treasury bills (short-term instruments) and eventually longer-duration Treasury notes to finance the recent package of extended tax cuts and heightened defense spending approved by the Trump administration. According to the Congressional Budget Office (CBO), these fiscal policies could add over $2.4 trillion to primary deficits over the next decade while increasing debt by nearly $3 trillion—or approximately $5 trillion if made permanent.
This surge in debt supply is likely to exert downward pressure on bond prices, consequently lifting yields. As analysts at T. Rowe Price noted in a recent report, “The U.S. Treasury’s eventual move to issue more notes and bonds will pressure longer-term yields higher.” These fiscal concerns have already affected longer-duration Treasury notes, where investors are demanding higher yields—a phenomenon known as the term premium—to lend money to the government for periods of ten years or more.
Fiscal Policy and the Yield Curve
The ongoing steepening of the yield curve, which reflects the widening spread between 10-year and 2-year yields, as well as between 30-year and 5-year yields, is primarily driven by the relative resilience of long-term rates and increasing concerns about fiscal policy. Kathy Jones, managing director and chief income strategist at the Schwab Center for Financial Research, recently articulated a similar concern, stating, “Investors are demanding a higher yield for long-term Treasuries to compensate for the risk of inflation and/or depreciation of the dollar as a consequence of high debt levels.” This sentiment suggests that long-term bond yields could remain stubbornly high, complicating the outlook for Bitcoin bulls.
Inflation’s Role in the Economic Landscape
Since the Fed initiated rate cuts in September 2022, the U.S. labor market has shown signs of considerable weakening, reinforcing expectations for a quicker pace of Fed rate cuts and a decline in Treasury yields. However, inflation rates have recently ticked higher, adding complexity to the situation. When the Fed cut rates last September, the year-on-year inflation rate stood at 2.4%. Last month, it surged to 2.9%, marking the highest reading since January’s 3%. This uptick in inflation undermines the case for rapid Fed rate cuts and a significant drop in Treasury yields.
Market Sentiment and Future Expectations
Yields have already come under pressure, likely reflecting market anticipation of Federal Reserve rate cuts. The 10-year Treasury yield fell to 4% last week, its lowest since April 8, according to data from TradingView. This benchmark yield has decreased over 60 basis points from its May peak of 4.62%. Padhraic Garvey, CFA, regional head of research at ING, suggested that the drop to 4% may be an overshoot. “We could see the 10-year Treasury yield targeting lower levels as an attack on 4% is successful. But that’s likely an overshoot to the downside. Higher inflation prints in the coming months will likely pose challenges for long-end yields,” Garvey remarked in a note to clients.
There is a possibility that rate cuts have already been factored into current yields, which could rebound sharply following the anticipated September 17 move. Historical patterns from 2024 suggest that the 10-year yield fell by over 100 basis points to 3.60% in the five months leading up to the September 2024 rate cut. However, after the central bank delivered additional rate cuts in November and December, the 10-year yield bottomed out and surged to 4.57% by year-end, eventually reaching 4.80% in January of this year.
What This Means for Bitcoin (BTC)
While Bitcoin surged from $70,000 to over $100,000 between October and December 2024 despite rising long-term yields, this rally was primarily driven by optimism around pro-crypto regulatory policies under President Trump and increasing corporate adoption of Bitcoin and other cryptocurrencies. However, these supportive narratives have considerably diminished when viewed through the lens of the past year. Consequently, the potential for higher yields in the coming months could pose a challenge to Bitcoin’s upward trajectory.
As the market braces for the upcoming Fed rate cuts, Bitcoin bulls must navigate a complex landscape marked by fiscal challenges, persistent inflation, and shifting market sentiments. Investors are encouraged to monitor these developments closely, as they will undoubtedly influence the future trajectory of Bitcoin and the broader cryptocurrency market.
Conclusion
The interplay between Fed rate cuts, Treasury yields, and inflation will be critical in determining the direction of Bitcoin and the overall cryptocurrency market. As the economic landscape continues to evolve, staying informed on these issues will be vital for investors looking to capitalize on potential opportunities in the crypto space.
For more information on how to invest in cryptocurrencies, check out our guides on How to Buy Bitcoin, How to Buy Ethereum, and How to Buy Solana.
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Meta Description: “Discover how anticipated Fed rate cuts could affect Bitcoin prices and Treasury yields. Learn what this means for crypto investors and the complex economic landscape ahead.”
